ISSN 2318-2377

TEXTO PARA DISCUSSÃO N° 519

THE GREAT DIVIDE:

The Paths of Industrial Competitiveness in Brazil and South Korea

João P. Romero
Elton Freitas
Gustavo Britto
Clara Coelho

Setembro de 2015

1
Universidade Federal de Minas Gerais
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Sandra Regina Goulart Almeida (Vice-reitora)
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2015 Competitiveness in Brazil and South
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ISSN 2318-2377
1. Brasil - Condições econômicas. 2.
Coréia (Sul) - Condições econômicas. I.
Romero, João P. II. Universidade Federal
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 UNIVERSIDADE FEDERAL DE MINAS GERAIS
FACULDADE DE CIÊNCIAS ECONÔMICAS
CENTRO DE DESENVOLVIMENTO E PLANEJAMENTO REGIONAL

THE GREAT DIVIDE: THE PATHS OF INDUSTRIAL COMPETITIVENESS IN BRAZIL

AND SOUTH KOREA*

João Prates Romero

(PhD Candidate, Department of Land Economy, University of Cambridge)

Elton Freitas
(Doutorando, Cedeplar-UFMG)

Gustavo Britto
(Professor e Pesquisador, Cedeplar-UFMG)

Clara Coelho
(Assistente de Pesquisa, Cedeplar-UFMG)

CEDEPLAR/FACE/UFMG
BELO HORIZONTE
2015

*
The authors would like to acknowledge financial support from CAPES, CNPq and Fapemig.
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 The Great Divide: the paths of industrial competitiveness in Brazil and south Korea – CEDEPLAR/UFMG – TD 519(2015)

SUMÁRIO

1. INTRODUCTION ............................................................................................................................... 6

2. PRODUCT AND ECONOMIC SOPHISTICATION ......................................................................... 7

2.1. Revealed comparative advantage, diversification and ubiquity ................................................... 7
2.2. Revealed comparative disadvantage, bottlenecks and potential industries ................................ 12

3. BRAZIL AND SOUTH KOREA’S DEVELOPMENT TRAJECTORY .......................................... 13

3.1. Data description .......................................................................................................................... 14
3.2. Changes in product space through time ...................................................................................... 15
3.3. Revealed Comparative Advantages ............................................................................................ 17
3.4. Revealed Comparative Disadvantages ........................................................................................ 23
3.5. Indicators of economic sophistication ........................................................................................ 29

4. CONCLUDING REMARKS ............................................................................................................. 31

REFERENCES ...................................................................................................................................... 33

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 The Great Divide: the paths of industrial competitiveness in Brazil and south Korea – CEDEPLAR/UFMG – TD 519(2015)

RESUMO

Esse artigo amplia a aplicação da metodologia desenvolvida por Hidalgo et al. (2007), Hausman
et al. (2007) e Hidalgo e Hausmann (2009) para analisar a relação entre mudança estrutural e sofisticação
econômica. Para isso, o artigo constrói redes do espaço do produto decenais a partir dos anos 1960 e
analisa indicadores de (des)vantagem comparativa para o Brasil e para a Coréia do Sul entre a década
de 1960 e os anos 2000. Os resultados mostram que apesar das rendas per capita dos dois países serem
similares no início do período, a Coréia do Sul cresceu mais rápido que o Brasil por se especializar em
produtos industriais de alta sofisticação e intensidade tecnológica.

Palavras-chave: Complexidade Econômica; Capacitações; Espaço do Produto; Brasil, Coréia do Sul.

ABSTRACT

The present paper expands the approach developed by Hidalgo et al. (2007), Hausmann et al.
(2007) and Hidalgo and Hausmann (2009) to analyse the relationship between structural change and
economic sophistication. To do so, the paper shows product space networks for each decade since the
1960’s and analyses revealed comparative (dis)advantages indictors for Brazil and South Korea from
the 1960s to 2000s. The results show that although having similar per capita GDPs in the beginning of
the series, South Korea achieved faster growth than Brazil by specialising in high sophistication,
technology intensive goods.

Key words: Economic Complexity; Capabilities; Product Space, Brazil; South Korea.

JEL Classification: O14; O19; O57; F14.

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 The Great Divide: the paths of industrial competitiveness in Brazil and south Korea – CEDEPLAR/UFMG – TD 519(2015)

1. INTRODUCTION

According to the structuralist literature that flourished in the 1960s and 1970s, economic development
is a process intimately connected to changes in the sectoral composition of production (e.g. e.g. Lewis,
1955; Rostow, 1958; Kuznets, 1966; Kaldor, 1966; Hirschman, 1958; Prebisch, 1962; Furtado, 1964).
In this approach, development and growth depend on moving production towards sectors that produce
goods that are complex and have high value added, in expense of sectors that produce goods that are
simple and have low value added.
More recently, a number of studies emphasise the importance of accumulating capabilities that
allow the production of more sophisticated goods, arguing that accumulating capabilities is a necessary
condition for structural change (e.g. Lall, 1992; Archibugi and Coco, 2005). In this literature,
capabilities are associated with non-tradable inputs, i.e. tacit knowledge, and a fair share of the works
in this approach has sought to identify and measure capabilities across countries or industries. However,
this is an extremely complex task.

Following this tradition, Hidalgo and Hausmann (2009) developed a new methodology for the
empirical analysis of the process of economic development. Instead of trying to directly measure
capabilities, this new methodology infers the complexity of a country’s productive structure based on
information about the products that the country exports with revealed comparative advantage (RCA –
Balassa, 1965). In other words, the approach assumes that countries that have RCA in the
production/trade of a particular product possess the capabilities required for the competitive production
of this product. Consequently, observing the number of products a country produces with RCA
(diversification) and the number of countries capable of producing each good with RCA (ubiquity)
makes it possible to establish the levels of sophistication of each product and of each country. Thus, in
accordance with the structuralist approach, in Hidalgo and Hausmann’s (2009) framework, each
country’s economic development is determined by its ability to accumulate the capabilities required to
produce more sophisticated products.

The present paper expands the approach developed by Hidalgo et al. (2007), Hidalgo and
Hausmann (2009) and Hausmann et al. (2007) to analyse the relationship between structural change and
economic sophistication. The paper explores two main arguments. First, given the relationship between
economic complexity and GDP per capita established in the literature, the product space network must
reflect the international division of labour as well as global trade patterns through time. Secondly, we
show that two very distinct paths of development can arise from an increasing export share of
sophisticated manufactures, at the one hand, and an increasing share of sophisticated of imports, on the
other. To do so, the paper constructs product space networks for each decade since the 1960’s and
analyses revealed comparative (dis)advantages indicators for Brazil and South Korea from the 1960s to
2000s.

Although Brazil and South Korea are very different countries in terms of culture, history, area
and population size, the two countries shared a very similar path of per capita GPD until the beginning
of the 1980s. In 1960s Brazil’s per capita GDP was actually higher than that of South Korea, and this
difference persisted until mid-1970s. By the end on the 1970s, however, this difference had already
vanished, and while Brazil started a path of stagnation, South Korea kept the pace of growth, achieving
a level of GDP per capita compatible with that of developed countries by 2010. Figure 1 illustrates the
great divide in the per capita GDPs of the two countries.
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 The Great Divide: the paths of industrial competitiveness in Brazil and south Korea – CEDEPLAR/UFMG – TD 519(2015)

FIGURE 1
Per capita GDPs of Brazil and South Korea

30000
25000
20000
15000
10000
5000
0
1960
1963
1966
1969
1972
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
2011
2014
Korea Brazil
Note: Figures in constant 2005 USD.
Source: Based on World Development Indicators.

This paper’s contribution to the existing literature is threefold. First, the paper uses trade data to
construct product networks for each decade in order to analyse how the structure of production and trade
changes through time. Following Hidalgo et al. (2007), the linkages between goods in the product spaces
were constructed based on the conditional probabilities of exporting different pairs of goods. Second,
the paper proposes to use an index of revealed comparative disadvantage (RCD) based on import data
to analyse the competitiveness of the domestic production in the local market. Intuitively, a decrease in
the number of industries with RCD indicates an increase in the competitiveness of the domestic
production in the local market. Third, the paper presents an empirical investigation of the determinants
of the development trajectories of Brazil and South Korea, which provides new insights about why the
movements in the GDP per capita of the two countries have been so different after 1980.

The remainder of the paper is organized as follows. Section 2 discusses the theoretical framework
and shows the evolution of the product space from 1965 to 2005. Section 3 discusses the evolution of
the productive structures of Brazil and South Korea. Section 4 brings concluding remarks.

2. PRODUCT AND ECONOMIC SOPHISTICATION

2.1. Revealed comparative advantage, diversification and ubiquity

Seeking to investigate the importance of the composition of a country’s production for economic
growth, Hausmann et al. (2007) proposed two measures of product and economic sophistication.

The product sophistication index, called PRODY, is represented by the income level associated
with each product, and is calculated as the weighed average of the income per capita of the countries
that export the given product. Formally:

7
 The Great Divide: the paths of industrial competitiveness in Brazil and south Korea – CEDEPLAR/UFMG – TD 519(2015)

" (x / x ) %
jk ∑ jk
$ '
PRODYk = ∑$ k
'Y j (1)
j $ ∑ (x jk / ∑ x )
jk '
# j k &

where x denotes the exports of good k by country j, and Y is income per capita. According to Hausmann
et al. (2007: 10), however, this weight captures the relative specialisation of the country in a given
product.

The PRODY index, therefore, ranks the commodities “according to the income levels of the
countries that export them” (Hausmann et al., 2007: 9). 2 This index, therefore, does not capture
differences in product sophistication between countries, and is an outcome-based measure of
sophistication that is based on the assumption that if a given product is largely produced by rich
countries, then the product is regarded as “sophisticated”.

The economic (or country) sophistication index, called EXPY, in turn, represents the
productivity level associated with a county’s export basket, and is calculated as the weighted average of
the sophistication of the products exported by the country. Formally:

" %
$ x jkt '
EXPY jt = ∑$ ' PRODYk (2)
k $ ∑ x jkt '
# k &

where the weights are the value shares of each product in the country’s total exports (Hausmann et al.,
2007: 10).

Using this approach, Hausmann et al. (2007) showed that current export sophistication is a good
predictor of future economic growth. In other words, this approach suggests that fast growing countries
have EXPY indexes higher than their actual per capita incomes (such as China and India), which
indicates they are producing goods associated with higher income levels (Hausmann et al., 2007: 3).

Nonetheless, although Hausmann et al. (2007) show that producing sophisticated goods leads
to high growth rates, the authors’ investigation provided only an initial approximation to the
determinants of EXPY. Hausmann et al. (2007) argue that entrepreneurship and cost discovery drive
structural transformations towards the production of highly sophisticated goods. Still, their empirical
investigation only indicates that EXPY is positive correlated with population size and land area, and not
correlated with human capital and institution quality (measured by rule of law).

Hidalgo et al. (2007) addressed this limitation by investigating whether the productive structure
of a country influences the path, the costs and the speed of change towards the production of
sophisticated goods. As the authors stress, the production of different types of goods requires different
capabilities. Consequently, a country’s capabilities determine the goods it can produce and how difficult
it is for the country to start producing goods that require different (or additional) capabilities.

2
To obtain a single ranking, the authors take the average of the PRODY over the years analysed.
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 The Great Divide: the paths of industrial competitiveness in Brazil and south Korea – CEDEPLAR/UFMG – TD 519(2015)

Conversely, the range of goods a country can produce and the sophistication of these goods indicates
the capabilities a country possesses.

Thus, to identify the efficiency of each economy in producing each product, Hidalgo et al.
(2007) used the index of revealed comparative advantage (RCA) developed by Balassa (1965):

" x / x %
$ jkt ∑ jkt '
RCA jkt = $ k
' (3)
$ ∑ x jkt /∑∑ x jkt '
# j j k &

The index of RCA developed by Balassa (1965) has a straightforward interpretation. If the index
is higher than one, then the country has high competitiveness in the production of the given good. The
opposite hols if the index is lower than one.

Hidalgo et al. (2007) then proposed to use conditional probabilities to establish how close
products are in terms of the capabilities required for their production. This approach is based on the
assumption that the probability of producing two products that require similar capabilities is higher than
the probability of producing two goods that require different capabilities. Thus, Hidalgo et al. (2007:
484) used trade data from UN Comtrade, which is available at a highly disaggregated level for a high
number of countries and years, to calculate the probability of a country exporting product i with RCA
given that it exports product k with RCA. The authors called proximity this conditional probability.
Finally, adopting a threshold value for proximity, the authors established linkages between products,
creating a network that they called product space. This network is presented in Figure 2.

Using product space, Hidalgo et al. (2007) showed that less developed countries tend to produce
goods with low number of linkages, which makes it difficult for these countries to diversify their
productive structure and move towards the production of more sophisticated goods. The opposite holds
true for developed countries. Thus, the authors reach three conclusions: (i) different countries face
different opportunities for increasing their economic growth, given their distinct productive structures
and associated capabilities; (ii) structural change and economic growth are highly path dependent, given
that each country’s initial productive structure reflects a different set of capabilities and these
capabilities determine the possible trajectories of structural change; and (iii) moving towards
sophisticated goods takes time, since this process requires leaning new capabilities and less sophisticated
goods are not associated with many other activities (Hidalgo et al., 2007: 487).3

3
Hidalgo et al. (2007: 487) simulated how the position of a country evolves when allowed to repeatedly move to products with
proximities greater than a given value. The simulation revealed that only after 20 iterations, in general, poor countries could
reach high-productivity areas of the product space.
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 The Great Divide: the paths of industrial competitiveness in Brazil and south Korea – CEDEPLAR/UFMG – TD 519(2015)

FIGURE 2
Product Space, 2000-2010

Source: Cedeplar-UFMG.

Another limitation of the measures proposed by Hausmann et al. (2007) is that the indicators do
not explain what makes the products exported by rich countries important for economic growth. Indeed,
the PRODY index is simply based on the assumption that sophisticated (high-productivity) goods are
the goods exported by high-income countries. As Felipe (2012: 38) stresses, this makes the approach
circular. Moreover, this creates some counter-intuitively high measures of product sophistication. To
illustrate this problem, Reis and Farole (2012: 50) point out that the PRODY of bacon and ham is higher
than the PRODY of internal combustion engines.

Hidalgo and Hausmann (2009) address this limitation by developing alternative measures of
product and economic complexity. The authors defined the degree of product diversification of a country
as the number of products that a country exports with RCA, and the degree of ubiquity of a product as
the number of countries that export a product with RCA. Formally:

D jt = ∑ N jkt (4)
k

U kt = ∑ N jkt (5)
j

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 The Great Divide: the paths of industrial competitiveness in Brazil and south Korea – CEDEPLAR/UFMG – TD 519(2015)

where D denotes diversification, U denotes ubiquity and N=1 if country j exports product k with RCA
at time t, and N=0 otherwise. Thus, the higher the diversification of a country’s exports is, the higher
this country’s sophistication is. In contrast, the lower the ubiquity of a good is, the higher its
sophistication is.

Using these indexes, Hidalgo and Hausmann (2009) and Felipe (2012) showed that economic
growth is strongly correlated with the production of a diversified basked of goods that are not exported
by many other countries. As Hidalgo and Hausmann (2009) argue, complex products are less ubiquitous.
Furthermore, countries that possess a high number of capabilities are capable of producing a higher
number of goods, which means they will tend to have more diversified productive structures. Indeed,
Felipe (2012) finds that the measures of economic and product sophistication proposed by Hidalgo and
Hausmann (2009) are highly correlated with measures of technological capabilities used in
Schumpeterian works (e.g. Archibugi and Coco, 2005). Consequently, this approach shows that not only
diversification and ubiquity are negatively correlated, which means diversified countries tend to produce
more complex (less ubiquitous) goods, but diversification is positively correlated with income level.

However, as Hidalgo and Hausmann (2009) and Hausmann et al. (2011) stress, diversification
and ubiquity are crude approximations of economic (or country) and product sophistication. On the one
hand, the ubiquity of a product can be low because of its rarity, as is the case of diamonds, and not
because of its complexity. On the other hand, a country can have low diversification, but produce highly
complex products.

Nonetheless, ubiquity and diversity can be combined to obtain better measures of economic and
product sophistication. A country with low diversification but that produces goods with high ubiquity
can be considered more sophisticated than a country that has similarly low diversification but produces
goods will low ubiquity. Analogously, a good with high ubiquity but produced by countries that have
low diversification can be considered less sophisticated than goods with similarly high ubiquity but
produced by countries that have high diversification.4 In other words, average ubiquity and average
diversification are better proxies for economic and product sophistication, respectively. Formally:

! 1 $
PSkt = # & ∑ N jkt D jt (6)
" Uk % j

" %
$ 1 '
ES jt = $ ' D jt (7)
$ ∑ N jktU kt '
# k &

where ES and PS stand for economic and product sophistication, respectively.5

4
As Hausmann et al. (2011: 20) stress, this process can be repeated to progressively increase the information captured by the
measures, which will converge after a few iterations.
5
It is important to note that ES is the inverse of the measure proposed by Hidalgo and Hausmann (2009). This makes its
interpretation more straightforward: the highest ES is, the highest the sophistication of the country is. This stems from the
fact that the highest the ubiquity of a product, the less unique it is, and the less sophisticated are the countries that produce it
(Felipe et al., 2013: 803).
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 The Great Divide: the paths of industrial competitiveness in Brazil and south Korea – CEDEPLAR/UFMG – TD 519(2015)

The measures developed by Hausmann et al. (2007) and Hidalgo and Hausmann (2009) have
been employed by a number of works to analyse the development trajectories of different countries,
taking into account the transformations in their productive structures. Felipe et al. (2010), for instance,
has shown that Pakistan was not able to move towards the production of more sophisticated goods,
which resulted in recurrent balance-of-payments problems, curtailing the country’s growth. Felipe et al.
(2013), in turn, showed that the successful development trajectory of China was associated with
progressive increases in the RCA of products with high sophistication (especially machinery and
electronics).

In addition, recent works have been extrapolating these measures and using them in econometric
investigations. Bochma et al. (2013), for example, applied the approach to the analysis of technological
proximity and technological change in US cities. Using patent data from the United States Patent and
Trademark Office (USPTO) disaggregated by International Product Categories (IPC), the authors
calculated an index of Revealed Technological Advantages (RTA) analogous to Balassa’s (1965) RCA
and used it to construct a technology space analogous to Hidalgo’s et al. (2007) product space. Using
the technological proximity between different patent classes, the authors showed that different
technological capabilities influence different trajectories of technological specialization between cities.
Bahar et al. (2014), in turn, used RCAs and an export similarity index to show that geographic proximity
influences the productive specialization of neighbouring countries. In other words, countries that are
geographically close tend to present RCAs in similar products. The authors attribute this result to
technological diffusion.

2.2. Revealed comparative disadvantage, bottlenecks and potential industries

This section presents the first set of contributions of this paper, which consists of proposing
indexes that complement the information provided by the indexes discussed in the previous section.

Using data on imports, it is possible to calculate indexes of revealed comparative disadvantage

(RCD) analogous to the index of RCA. Formally:

" m / m %
$ jkt ∑ jkt '
RCD jkt = $ k
' (8)
$ ∑ m jkt /∑∑ m jkt '
# j j k &

where m denotes imports.

This measure captures the competitiveness of the domestic production in the local markets. If
RCD>1, the country is an effective importer of good k, while if RCD<1, the country is not an effective
importer, which means its competitive disadvantage is not too large. The most interesting case is the
later, which indicates that although the country has no RCA in the production of a given good k, the
domestic production is still capable of competing with imports. This situation is similar to the case of
non-traded goods described in international trade theory. As Dornbusch et al. (1977) have shown, in

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 The Great Divide: the paths of industrial competitiveness in Brazil and south Korea – CEDEPLAR/UFMG – TD 519(2015)

theory, a country might produce goods in which it has a comparative disadvantage if transportation costs
or tariffs are large enough to compensate for the advantage that the foreign competitors possess. Still, it
is also possible that domestic production is so weak that there are no imports of some intermediate
products, or that the level of income of the domestic economic does not generate enough demand for
some particular products.

Thus, analogously to the index of export diversification D, it is possible to develop indexes to

indicate the size of the bottlenecks (B) of the domestic productive structure, the number of industries
where intra-industry (I) trade occurs (i.e. industries with both RCA and RCD), and the number of
industries with potential (P) to become competitive exporters (i.e. the industries in which domestic
production has no RCA, nor RCD), namely:

B jt = ∑ M jkt (9)
k

I jt = ∑ N jkt M jkt (10)

k

Pjt = T + I jt − ∑ (N jkt + M jkt ) (11)

k

where M=1 if country j imports product k with RCD at time t, and M=0 otherwise. Moreover, T is the
total number of industries,

Using these indexes it is possible to identify how the domestic production is performing in the
local market. Hence, this analysis complements and extends the approach proposed by Hidalgo’s et al.
(2007) and Hidalgo and Hausmann (2009). Most importantly, these indexes make it possible to observe
how the industries without RCA are performing, indicating if they are becoming industries with a
potential to export, or if they are loosing competitiveness and becoming industries with RCD.

It is important to note, however, that the index P provides only an indication of the industries
that might have some potential to become exporters. Although this index assumes that an industry
without RCD has a relative level of competitiveness in the domestic market, another scenario is possible:
the industry might not have RCD because imports are low due to the lack of demand for this product at
home, especially when considering intermediate inputs that are not used in the local production, or when
the domestic demand for a final product is low because of different preferences or income levels.
Analogously, an industry might not have RCA because domestic production exists but its not
competitive enough, but it is also possible that an industry has no RCA because there is no domestic
production of this product at all. Thus, these important caveats must be kept in mind when analysing the
number of potential industries.

3. BRAZIL AND SOUTH KOREA’S DEVELOPMENT TRAJECTORY

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 The Great Divide: the paths of industrial competitiveness in Brazil and south Korea – CEDEPLAR/UFMG – TD 519(2015)

3.1. Data description

To analyse the development of the productive structures of Brazil and South Korea between
1962 and 2010 using the methodology described in the previous section, trade data classified according
to the Standard International Trade Classification (Revisions 1 and 2) 4-digits was gathered from the
UN Comtrade. This classification encompasses 613 products in revision 1, and 784 products in revision
2. The two versions are used in this work due to fact that revision 1 is the only one available from 1962
to 1973. These industries were divided in 6 technological sectors, following the classification proposed
by Lall (2000): (i) Primary Products, with 135 industries in revision 1 and 148 industries in revision 2;
(ii) Resource-Based Manufactures, with 187 industries in revision 1 and 197 industries in revision 2;
(iii) Low-Tech Manufactures, with 128 industries in revision 1 and 161 industries in revision 2; (iv)
Medium-Tech Manufactures, with 113 industries in revision 1 and 202 industries in revision 2; (v) High-
Tech Manufactures, with 38 industries in revision 1 and 66 industries in revision 2; and (vi) Other
Manufactures, with 12 industries in revision 1 and 10 industries in revision 2. Whenever possible,
revision 2 is utilized, although in some cases it is necessary to use revision 1 to make comparisons
throughout the whole period possible.

TABLE 1
Average index of product sophistication (PS) by technological sector

Primary Resource- Other

Low-Tech Medium-Tech High-Tech
Products Based Manufactures
-0.711 -0.230 0.205 0.714 0.806 0.120
Source: Cedeplar-UFMG.

Table 1 above shows the average product sophistication (PS) of each technological sector. This
table indicates how there is a clear correlation between the technological content of each industry and
the level of sophistication of its production. Consequently, this table justifies the focus of this paper on
the division of industries according to Lall’s (2000) technological classification, since a process of
structural change towards high-tech industries can be also interpreted as a process of increase in the
sophistication of the country’s productive structure.

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 The Great Divide: the paths of industrial competitiveness in Brazil and south Korea – CEDEPLAR/UFMG – TD 519(2015)

3.2. Changes in product space through time

To understand how the structures of world production and trade have changed through time, a
product space was constructed for each decade. Changes in this network are associated with the
evolution of international division of labour, which are reflected in the transformations in patterns of
international trade. The evolving structure of the product space, which represents the second
contribution of the paper, is shown in Figure 3 below. The upper part of the figure shows the long-term
change of the product space from 1965 to 2005. The lower part of the figure shows the progressive,
decennial changes occurred in between, in 1975, 1985 and 1995, respectively.
The shape of the network for 2005, as can be readily seen, is exactly the same as Hidalgo et al.
(2011) presented in Figure 2 above. However, in this case products are classified using the technological
classification of products developed Lall (2000), instead of Laemer’s (1984) classification used by
Hidalgo et al. (2007). This classification should provide more information about the characteristics of
simple and sophisticated products. Similarly to the original product space, there is a clear-cut
segmentation of the product space. High- and medium-tech goods are positioned to the centre-left of the
figure. In this region a clear blue stripe can be seen. It corresponds to electronic and chemical goods.
On the other hand, low-tech, resource-based and primary goods are generally located to the centre-right
of the figure, with the latter also poisoned in the fringes of the product space. A distinct node of low-
tech (garments) goods is visible, surrounded by other low-tech and primary goods. The product space
for 1965 is considerably more concentrated around a large central node, formed mostly of high, middle
and low-tech goods. A more disperse ring of the same type of goods appears around the central node,
with low-tech goods spilling over to the lower left. On the other hand, resource-based and primary goods
are plotted in the fringes, particularly in the upper-left side of the network. This structure is consistent
with marked division of labour and trade between primary and manufactured goods.
All networks were constructed using the Maximum Spanning Tree method, which, amongst
other things requires selecting a threshold for the proximity between nodes in other to allow for a
meaningful visualisation of the links between nodes. From 1965 to 2005, this threshold decreases
markedly. To plot the network in 1965 a threshold of 0.70 was necessary. For 1975 and 1985, however,
the proximity adopted was 0.65, and for 1995 the proximity was 0.55, as for 2005. These calibration
changes carry information regarding international trade patterns as well as country specialisation. This
figures show that the probability of co-exporting a number of goods was very much higher in the 1960s,
which indicates that international trade was more concentrated in terms of value and more segmented
in terms of sectors.
With time, the diversity of exported goods increases, as does the participation of less developing
industrializing countries in international trade. Parallel advances in the internationalisation of
production, with the proliferation of multinational corporations, also contribute to the increase of intra-
industry and intra-sectoral trade. On the other hand, product differentiation and sophistication increases
consistently, stemming from ever growing technological efforts in more advanced countries. As a result,
the product space changes accordingly. The shapes of the networks in the lower part of Figure 3 show
this dynamic. The network becomes more elongated, and the distinction of goods using the technological
intensity increases steadily to form the familiar shape in 2005.
The changing shape of the network is instrumental in showing the importance of considering
products in terms of technological intensity in addition to more traditional resource based classifications.
As it is clear in Figure 3, there is a growing segmentation of exports in terms of technological intensity
within the networks from 1965 to 2005 with a line leading from low-tech, in the right hand side, though
medium tech in the middle, to high tech in the right hand side.

15
 The Great Divide: the paths of industrial competitiveness in Brazil and south Korea – CEDEPLAR/UFMG – TD 519(2015)

FIGURE 3
Changes in product space through time
1965 2005

1975 1985 1995

Note: Networks for 1965 and 1975 were calculated using SITC Rev. 1 (4-digits), and the remainder using SITC Rev. 2 (4-digits).
Source: Cedeplar-UFMG.

16
 The Great Divide: the paths of industrial competitiveness in Brazil and south Korea – CEDEPLAR/UFMG – TD 519(2015)

3.3. Revealed Comparative Advantages

Figure 4 shows the evolution of productive diversification in Brazil and South Korea, dividing
the figures by technological sectors. This figure conveys four important pieces of information:

(i) Brazil has always been more competitive in Primary Products than South Korea, while the
latter has always been more competitive in Low-Tech Manufactures than Brazil;
(ii) from 1978 onwards Brazil has focused on increasing the competitiveness of Resource-Based
Manufactures , while South Korea has focused on increasing the competitiveness of Low-
Tech Manufactures;
(iii) diversification in Medium-Tech Manufactures is, in general, similar in both countries
throughout the period;
(iv) the number of High-Tech Manufactures with RCA is considerably larger in South Korea.

Brazil had already a considerable number of Primary Products and Resource-Based

Manufactures with RCA in 1960. Heavy industries started to be created and supported since the
dictatorship of president Vargas, from 1930 to 1950, and automobile and communication industries were
settled during the government of president Kubtschek from 1955. After the military coup that took place
in Brazil in 1964, a number of reforms were implemented: (i) fiscal reform; (ii) restructuration of the
financial system; (iii) reduction of the inflation rate; and (iv) adoption of industrial policies to incentivise
exports. From 1964 to 1973 Brazil experience a miraculous growth of over 8% per year, based on the
strategy of industrialization via import substitution. With the first oil chocks of 1973, however, Brazil
started to experience balance-of-payment difficulties, and president Geisel chose to go ahead with the
process of import substitution, incentivizing the domestic production of intermediate inputs and
machinery (Burlamaqui et al., 2006: 11).

In the 1980s, after the second oil shock, Brazil’s growing foreign debt forced a recessive
adjustment and ended up in a default in 1986. The decade was marked by slow growth and
hyperinflation. Only in 1994 the inflation was controlled. A restructuration of the financial system was
implemented, and a rapid process of liberalization and privatization took place. During these two
decades, however, the GDP growth rate was just over 2% (see Netto, 2005). Only after 2004 growth
rates recovered, staying around 4%, motivated by the country’s economic stability, the recovery of state
investment, and the policies of wage increase and income distribution that motivated the growth of the
domestic market (Serrano and Summa, 2011). As Figure 3 shows, however, after the liberalization that
took place from 1994 onwards, a process of further specialization on primary and resourced base goods
often termed “re-primaryzation” unfolded in the Brazilian economy.

17
 The Great Divide: the paths of industrial competitiveness in Brazil and south Korea – CEDEPLAR/UFMG – TD 519(2015)

FIGURE 4
Trade Diversification, 1962-2010

BRAZIL

200

3 1 2
150 4 3 31 2
29 3 3 29 34 39 2
3 4 4 5 25 27 26 25
3 23 6 3 19 25 25 38 30
5 29 29
100 10 4 17 19 14 36 35 31 31 21
12 33 35 29 29
2 81 27 28 29 31
5 21 55 56 51
3 3 17 64 57
8 5
2 9 13 34 45 46 46 54 59 54 57
50 4 26 28 32 35 39 41 49
18 23 24
44 44 44
29 33 31 34 32 36 33 34 32 28 29 28 30 28 33 30 30 29 35 39
0

KOREA

200

150 9
9 8
18 9 9 27 25 7 9 9
6
15 19 23 22 11 10 25 9 9 6 7
100 7 20 23 26
62 30 25 29 7 9 9 8
2
4 63 4 58 69
5
7
7 46 55 64 63 65
29 31 31 31
29 33 65 61 64 59 50 46 42
50 29 34 37 29 34 29
18 19 27 35 33 30 27 28 20
15 20 21 13 15 19 15 12 20 23 14 15 15 17
25 21 15 15 19 19 14 14 14 18 15 11 10 9 10 10 11 11 8 7 10 9 11
0
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
Primary Products Resource-Based Low-Tech Medium-Tech High-Tech

Note: SITC Revision 1 (4-digits) was used throughout the whole period.
Source: Cedeplar-UFMG.

South Korea, in contrast, had about half as many industries with RCA as Brazil in 1960. South
Korea was governed by a military ruling group from 1961, led by Park Chung Hee until 1963, when
Park was elected president. The period from 1963 to 1972 in South Korea is known as Third Republic
and was the beginning of an industrialization effort, initially focusing on developing basic institutions
to support the adoption of foreign technology. Since 1962 South Korean governments have formulated
a series of five-year plans for economic growth. The objective of the first two plans was to build an
industrial base, increase energy production and encourage companies to invest in acquisition of
technology (see Ministry of Science, ICT and Future Planning, 2012; Kuznets, 1990; Collins, 1990).
Besides the five-year plans, during president Park’s term major changes were made in terms of the
macroeconomic situation: (i) exchange rate reform; (ii) reduction of the inflation rate; and (iii) rise of
the real interest rate, all of them were fundamental to finance the high investment rates required in a
rapid growth process. A particularity of this case is that the foreign direct investment was not the main
form of financing, South Korea financed industrial investments through long term foreign loans,
18
 The Great Divide: the paths of industrial competitiveness in Brazil and south Korea – CEDEPLAR/UFMG – TD 519(2015)

selecting target industries for investment what stimulated the creation of chaebols, conglomerates of
business very important to the productive structure of South Korea (see Zeile, 1991; Chung, 2011: 335).
During the 1960s, the chaebols were concentrated in the production of Low-Tech Manufactures, passing
to the heavy Medium-Tech Manufactures and High-Tech Manufactures industries during 1970, with
marked presence of the chemical, naval, automobile and machinery industries (see Jacobsson, 1993;
Woo-Cumings, 1999: 120 This shift from a light industry centered structure to a heavy centered was
planned in the third five year plan (1972-1976) and can be seen in Figure 3. In 1960s South Korea was
constructing an industrial base focusing on Low-Tech Manufactures. In 1970s the shift started and
Medium-Tech Manufactures importance grew really fast. The number of High-Tech Manufactures
industries with RCA did not suffer major alterations, but their share in exportations grew in the 1980s,
signalling the concentration of the knowledge. In 1974, while the number of industries with RCA in
Brazil was around 100, in South Korea this number was already around 150. In 1980, however, this gap
was closed, due to the second development plan of the Brazilian President Geisel.

In the 1980s, South Korea went through a process of re-democratization that reduced the
government’s capacity to implement reforms and imposed the adoption of programs of structural
adjustment and stabilization. Alongside with the more complex and sophisticated technological
requirements of the South Korean industries and the effects of the oil shocks, this process created some
difficulties for the continuity of the country’s development strategy. Interestingly, democracy not only
empowered worker movements, but it also generated channels for chaebols to pose its demands to the
government, strengthening these groups as well (Chang, 2006, chap. 6). Hence, the 1980s were
characterized by: (i) a change in the industry policy – more indirect and focused only on functional
support to manufacturing; (ii) attempts to stimulate small and medium enterprises; (iii) financial
liberalization; and (iv) trade liberalization with the establishment of a Tariff Reform Committee in 1983
and abolition of tariff exemptions for strategic industries in 1984 (Harvie and Lee, 2003).

Finally, in the end of the 1990s South Korea suffered with the Asian crisis, but was able to adopt
reforms that led to its recovery. Financial system regulation was strengthened via the creation of the
Financial Supervisory Commission, during Kim Dae Jung’s term. This autonomous institution sought
to introduce changes in corporate governance, deciding the feasibility of banks and reducing the
diversification of the chaebols by eliminating the cross subsidization and concentrating the groups in
the sectors they were more specialized in (Haggard, 2000, p. 142). Moreover, the reduction of the
restrictions on foreign competition that started in the 1980s and was consolidated during the 1990s
provided additional contribution to the process of reduction of the diversification of the chaebols and of
the South Korean economy as a whole, as shown in Figure 3.

In addition, it is also important to note that the development experiences of Brazil and South
Korea were also distinct due to differences in: (i) investment in education; (ii) investment in research
and development (R&D); (iii) distribution of income; and (iv) presence of an earlier industrialising
country in the region – Japan was a strong partner of South Korea in 1980s, and the original equipment
manufacturer (OEM) agreements made technological advances possible in a international scenario that
was not favourable (Etkowitz and Brisolla, 1999).

19
 The Great Divide: the paths of industrial competitiveness in Brazil and south Korea – CEDEPLAR/UFMG – TD 519(2015)

FIGURE 5
Diversification of Brazil through time

1965 2005

1975 1985 1995

Note: Networks for 1965 and 1975 were calculated using SITC Rev. 1 (4-digits), and the remainder using SITC Rev. 2 (4-digits).
Source: Cedeplar-UFMG.

20
 The Great Divide: the paths of industrial competitiveness in Brazil and south Korea – CEDEPLAR/UFMG – TD 519(2015)

Figures 5 and 6 illustrate the evolution of the productive structures of Brazil and South Korea,
respectively. The networks for 1965 indicate how the productive structure of South Korea was already
more focused on low-tech products, while Brazil was still producing mostly primary products. Turning
to the networks for 2005, it is noticeable that the Brazilian productive structure becomes more
diversified, with a considerably larger number of industries with RCA across all sectors, but mostly
resource-based and medium-tech. Yet, Brazilian exports are still marked by a considerable number of
primary products with RCA. In the network of South Korea, in turn, there is an evident reduction in the
number of primary and low-tech industries, with marked increases in the medium- and high-tech
industries.

Confronting Figure 4 with Figure 1, however, it becomes clear that from 1980 onwards, the
diversification of South Korea started to decrease, while Brazil’s diversification continued to increase.
Hence, apart from the superiority of South Korea in the production of Low-Tech Manufactures and
High-Tech Manufactures, these figures don’t seem to provide a clear answer to the great divide shown
in Figure 1.
Figure 7 present the shares of exports from each sector in the total exports of Brazil and South
Korea. These figures show a striking difference between the export structure of the two countries. On
the one hand, Brazil could not reduce the share of Primary Products and Resource-Based Manufactures
(put together) below 50% of total exports, while Medium-Tech Manufactures and High-Tech
Manufactures reached only 25 and 7% of total exports, respectively. On the other hand, South Korea
managed to reduce the share of Primary Products and Resource-Based Manufactures (put together) to
8% of total exports, while Medium-Tech Manufactures and High-Tech Manufactures reached 44 and
29% of total exports, respectively.

This investigation shows that the number of industries with RCA is not as important as the share
of the exports in Medium-Tech Manufactures and High-Tech Manufactures. In other words, low
diversification is not a problem, when the share of Medium-Tech Manufactures and High-Tech
Manufactures is high enough.

21
 The Great Divide: the paths of industrial competitiveness in Brazil and south Korea – CEDEPLAR/UFMG – TD 519(2015)

FIGURE 6
Diversification of South Korea through time

1965 2005

1975 1985 1995

Note: Networks for 1965 and 1975 were calculated using SITC Rev. 1 (4-digits), and the remainder using SITC Rev. 2 (4-digits).
Source: Cedeplar-UFMG.

22
 The Great Divide: the paths of industrial competitiveness in Brazil and south Korea – CEDEPLAR/UFMG – TD 519(2015)

FIGURE 7
Export shares by technological sectors, 1962-2010

BRAZIL

100 0
3 0
1
3 1
3 1
4 2
2 23 14111
2
4 4 1
1 3 16 5 1 1
5 1
4 1
5 1 2 2 5
1 3 2 5 6 5 7 13 11 8 8
8 10 16
5 7
22 8
19 19 18 21 25 25
80 23 25 9 8 28 27 26 28 28 27 25
26 11 11 11 15 25 24
30 25 16 16 15
60 38 26 17 16 14 12 11 11 9 7
32 12
32 34
40 27 26 30 26
74 70 68 27 28 30 30 26 26 24 27
62
53 52
20 38 43
34 32 29 29 28
24 22 24 24 22 21 26 28 26 30
0

SOUTH KOREA

100 1
4 2 0 1 1 0 0 0 0 0 0 0
0
4 0
6 0 0 0 0 0 0 7 13
5 9 12 11 11 12 10 14
7 5 17 20 23 23 28 30 29
7
80 29 12 15 20 24 36 35 38
39 31 34 26
48 53 33 29
31 30
60 54 35
51 52 38 42 38
35 49 46 34 41
40 30 42 40 43
44
40 41 39
26 21 36 31
20 19 24 19 19 16
30 17 15 12 13 15 12 10 9
22 16 15 9
11 8 6 8 6 5 9 8 6 7 8 7 6 10 11 6 6 6 6
0 4 4 4 3 3 3 3 3 2 2 2 3 2
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
Primary Products Resource-Based Low-Tech Medium-Tech High-Tech Others

Note: SITC Revision 1 (4-digits) was used throughout the whole period.
Source: Cedeplar-UFMG.

3.4. Revealed Comparative Disadvantages

Figure 8 complements the analysis of the previous section, showing the evolution of bottlenecks
in the productive structures of Brazil and South Korea, dividing the figures by technological sectors.
This figure conveys five important pieces of information:

(i) Brazil has always been less competitive domestically in Medium-Tech Manufactures and
High-Tech Manufactures than South Korea;
(ii) Brazil and South Korea have had considerably similar number of bottlenecks in the Primary
Products and Resource-Based Manufactures;

23
The Great Divide: the paths of industrial competitiveness in Brazil and south Korea – CEDEPLAR/UFMG – TD 519(2015)

(iii) the depression in the number of bottlenecks in Brazil during between 1980-1986 is a result
of the external adjustment that the Brazilian economy went through, which resulted in a
considerable decrease in the country’s imports;
(iv) there has been an increase in the number of bottlenecks in Primary Products and Resource-
Based Manufactures sectors in South Korea since 1985;
(v) from 2002 onwards there has been a decrease in the bottlenecks in Primary Products in both
economies.

FIGURE 8
Bottlenecks by technological sector, 1962-2010

BRAZIL

250

200 24 21 21
17 19 18 20
25 16 54 56 56 48
23 22 45 54 18
150
23
26
23 18 16 16 18 41 47
20 52 58 15 36 23 23 24 22 50
100 35 38
48 52 47 40 36 14
34 38 20 22 27 21
21 25 27 23 13 9 13 18 18 22
14 17 13 27 24 72 65 71 65
50
18
48 12 9 49 49 51 61 64 68 60
43 45 48 48 47 44 40 46 34 36 54
24 21 24 24 23 18 21 27 25 19 18 36 32 37 39 40 37 35 43 38 35 35 19
0

SOUTH KOREA

250

200 13 10 16
14 11 14 15
57 55 46 18 17
18 46 48 14 34 34 14 7
150
6 8 7
10 11 11 38 46 43 36 33 32 27
9 12 37 34 33
10 6 42 36 38 49 41 39 32 34 30 21 20 33
33 23
100 45 43 29 27
29 35 21 27 28 29 21 63 72 58 68
15 19 22 57 65 65 63 62 55 62 55
18 44 49 51
50 46 45 38 37 42 44 43
36 53 48 41 40
16 19 18 32 24 26 27 28 32 34 35 42 43 45 51 46 43 45 45
0
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008

Primary Products Resource-Based Low-Tech Medium-Tech High-Tech

Note: SITC Revision 1 (4-digits) was used throughout the whole period.
Source: Cedeplar-UFMG.

24
 The Great Divide: the paths of industrial competitiveness in Brazil and south Korea – CEDEPLAR/UFMG – TD 519(2015)

FIGURE 9
Bottlenecks of Brazil through time
1965 2005

1975 1985 1995

Note: Networks for 1965 and 1975 were calculated using SITC Rev. 1 (4-digits), and the remainder using SITC Rev. 2 (4-digits).
Source: Cedeplar-UFMG.

25
 The Great Divide: the paths of industrial competitiveness in Brazil and south Korea – CEDEPLAR/UFMG – TD 519(2015)

FIGURE 10
Bottlenecks of South Korea through time

1965 2005

1975 1985 1995

Note: Networks for 1965 and 1975 were calculated using SITC Rev. 1 (4-digits), and the remainder using SITC Rev. 2 (4-digits).
Source: Cedeplar-UFMG.

26
 The Great Divide: the paths of industrial competitiveness in Brazil and south Korea – CEDEPLAR/UFMG – TD 519(2015)

Figures 9 and 10 illustrate the evolution of the bottlenecks in the productive structures of Brazil
and South Korea, respectively. The networks for 1965 indicate how the bottlenecks of the productive
structures of Brazil and South Korea were not that different in the beginning of the period under
investigation. Both countries had most bottlenecks in resource-based medium-tech industries, followed
by high-tech industries. Turning to the networks for 2005, however, it is noticeable how South Korea
manages to reduce the bottlenecks in medium-tech industries, in the centre part of the network, while
increasing the bottlenecks in primary products, in the periphery of the product space. The Brazilian
bottlenecks, in contrast, remain with a similar distribution, with a slight increase in medium-tech
industries.

FIGURE 11
Import shares by technological sectors, 1962-2010

BRAZIL

100 1 1 1 2 1 0 0 0 0 0 0 0
7 13 0 1 1 1 0 0 0 9
8 9 12 13 13 10 10 10 8 9 15 14 15 17 18 21 26 25 22 23
21 16 16 16
80 25 28 28
31 37 29 31 3 3 24 26 28
3 10 11 29
6 7 42 4 36 34 38
60 4 14 35 35 36
13 5 14 4 6 5 36 37
18 18 7 13 17
9 18 18
40 19 7 14 20 6 8
8 7 7 6 7 7
16 14 63
53 62 23 20
18 14 14
15 14 12
20 41 37 44 42 36 34
30 24 33 40 30
21 18 18 14 17 18 21 21 19
0

SOUTH KOREA

100 0
6 4 1 1 0 0 0 0 0 1 1 0 0 0 0 1 0 0 0 0 1 6 4
7 9 11 9 10 10 10 10 13
18 20 18 19 22 23
27 29 27 26 21 16
80 32 39 23 23
41 34 34 32 29 34 30 23
6 7 30 29 30 29
60 31 31 23 21 24 25 22
8 8
12 9 9 7 9 20 17 7 8 9
12 18 9 8 8 7 7 9 8 8
40 22 20 16 9 9 12
20 18 17
20 18 17 18 20 17 14 13 16 14 13 12 12
20 42 42 36
32 24 28 28 32 35 30 34 27
24 24 26 23 24 28 28 27 28 31
21
0
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008

Primary Products Resource-Based Low-Tech Medium-Tech High-Tech Others

Note: SITC Revision 1 (4-digits) was used throughout the whole period.
Source: Cedeplar-UFMG.

27
 The Great Divide: the paths of industrial competitiveness in Brazil and south Korea – CEDEPLAR/UFMG – TD 519(2015)

Figure 11, in turn, presents the shares of the imports from each sector in the total imports of Brazil
and South Korea, respectively. This figure shows that the import structure of the two countries is in fact
very similar, with only two minor differences. Firstly, Brazil could not reduce the share of Medium-
Tech Manufactures imports, which have indeed increased since1984, going back to levels similar to
those observed in the 1970s. Secondly, Brazil has managed to reduce its share of Primary Products
imports since the second oil crisis and the debt crisis of mid-1980s, while was not capable to do so and
in effect increase its share of Primary Products imports since 1996.

It is interesting to note, therefore, that despite the high share of High-Tech Manufactures exports
in South Korea, the share of imports from this sector has also been increasing, which highlights two
aspects of international trade: (i) the production of High-Tech Manufactures has a significant degree of
international interdependency, with different components being produced in different countries; and (ii)
there is a tendency towards the diversification of consumption in Medium-Tech Manufactures and High-
Tech Manufactures, which contributes to the increase of intra-industry trade.

FIGURE 12
Diversification, bottlenecks, potential exporters and intra-industry trade

BRAZIL

600
500
400
300
200
100
0

SOUTH KOREA

600
500
400
300
200
100
0
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008

Potential Industries RCD Industries Intra Industry RCA Industries

Note: SITC (Revision 1) 4-digits was used. The total number of industries is 613.
Source: Cedeplar-UFMG.

28
 The Great Divide: the paths of industrial competitiveness in Brazil and south Korea – CEDEPLAR/UFMG – TD 519(2015)

Finally, Figure 12 compares the number of industries with RCA and RCD, with the number of
industries that do not have neither RCA nor RCD, and with the number industries that has both RCA
and RCD.

Figure 12 shows once again that Brazil and South Korea went through a similar process of
economic development until 1980. Both countries experienced a fall in the number of potential
industries due to increasing diversification until 1972. From that year to 1980, the diversification of
South Korea remained virtually unchanged, with the number of potential industries falling due to an
increase in the bottlenecks. Meanwhile, the number of potential industries in Brazil remained unchanged
due to reductions in diversification that compensated the increases in bottlenecks. Moreover, intra-
industry trade increased moderately in both countries.

After 1980, however, the two countries start to follow distinct paths. During that period the
similarity between the two countries was that both bottlenecks and intra-industry trade remained
virtually unchanged. On the one hand, South Korea went through a continuous reduction in
diversification with an associated increase in potential industries. On the other hand, disregarding the
decade of 1980, which was deeply affected by the Brazilian debt crisis, from 1990 to 2002 Brazil
experienced increasing diversification with a reduction in the potential industries as counterpart.
Nonetheless, after 2002 this process inverts, with diversification reducing and potential industries
increasing.

It is important to note, therefore, that while bottlenecks and intra-industry trade remains roughly
unchanged in both countries, variations in the number of potential and competitive industries tend to be
more prominent.

3.5. Indicators of economic sophistication

Although the analyses presented in the previous sections are informative, the evolution of
diversification and bottlenecks is insufficient to provide a complete explanation for the distinct
development trajectories of the two countries.

Confronting the South Korean success with the Brazilian tragedy, as illustrated in Figure 1, the
information provided in Figures 4 and 7 highlights how relevant the difference in the population size of
the two countries is to understand the great divide of the trajectories of their per capita GDPs. For South
Korea, around 30 Medium-Tech Manufactures industries with RCA and around 10 High-Tech
Manufactures industries with RCA were enough to generate the impressive increase in per capita GDP
portrayed in Figure 1. For Brazil, however, around 25 Medium-Tech Manufactures industries with RCA
and around 2 High-Tech Manufactures industries with RCA were not enough to promote a parallel
increase in per capita GDP. Using the ratio Medium-Tech Manufactures plus High-Tech Manufactures
industries with RCA to total population as a basic indicator of the structural change required for
development, it is possible to observe that South Korea reached a level (0.81) similar to that of developed
countries, such as Canada (0.84) and UK (0.92), while Brazil stayed in a level (0.21) closer to less
developed economies, such as Russia (0.15) and Venezuela (0.22).

29
 The Great Divide: the paths of industrial competitiveness in Brazil and south Korea – CEDEPLAR/UFMG – TD 519(2015)

FIGURE 13
Competitive production of medium-
and high-tech products and GDP per capita

Note: Low-income=under 1045 USD; Medium-income=between 1046 and 12746 USD;

High-income=over 12746 USD. Data used is for the year of 2005.
Source: Cedeplar-UFMG.

Figure 13 shows how the ratio of medium- and high-tech industries with RCA to population is
positively correlated with per capita GDP. Hence, this Figure shows that while South Korea managed
to reach a ratio as high as observed in developed countries, Brazil’s size required further diversification,
and the country’s policies were not capable of sustaining this process. As Jacobsson (1993) highlights,
the time and costs required for learning to efficiently produce high-tech goods has been increasing
through time. Consequently, increasing diversification in these industries becomes more and more
difficult through time. Nonetheless, the index presented in Figure 13 is only a partial explanation for the
great divide.

Figure 14 uses the index of economic sophistication (ES), described in equation (7), to analyse
the evolution of the sophistication of the Brazilian and the South Korean economies. This figure shows
how South Korea and Brazil went through rapid transformations from 1962 to 1975, with the ES of
South Korea increasing from -0.01 to 1.1, and the ES of Brazil increasing from -0.45 to 0.35.
Nonetheless, since the beginning of this process, South Korea’s sophistication was already much higher
than Brazil’s. From 1975 to 1992, South Korea experienced a decrease in the sophistication of its
productive structure (ES of 0.58 in 1992), while Brazil’s sophistication remained virtually unchanged
(ES of 0.38 in 1992). From 1992 onwards, however, South Korea’s sophistication started to increase
rapidly once again, reaching its peak in 2006 (ES of 1.82). This process is a result of the increase of the
share of medium- and high-tech exports, which went from 58% to 69% during this period, as shown in
Figure 7. Meanwhile, although Brazil managed to generate a moderate increase in its sophistication until
2000 (ES of 0.68), from then on there has been a dramatic decrease in the country’s level of productive
sophistication, which culminated in a negative ES (-0.29) in 2008. This process of reduction of the
economic sophistication of Brazil is clearly a reflection of the re-primaryzation of the economy, as

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 The Great Divide: the paths of industrial competitiveness in Brazil and south Korea – CEDEPLAR/UFMG – TD 519(2015)

already highlighted in the previous sections, and as reflected in Figure 7, which shows that the share of
primary and resource-based exports increased from 49 to 56% during this period.

FIGURE 14
Economic sophistication of Brazil and South Korea

2
1.5
1
0.5
0
-0.5
-1
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
Brazil's ES Index Korea's ES Index

Source: Cedeplar-UFMG.

The combined analysis Figure 14 with Figure show how changes in export shares that may seem
moderate at first can be in effect the determinant of the country’s future development trajectory. In the
case of Brazil, an increase of 7 percentage points in the share of primary and resource-based exports
represented a considerable reduction in the country’s sophistication, which raises concern about the
future development of the economy. In the case of South Korea, an increase of 11 percentage points in
the share of medium- and high-tech exports represented a remarkable increase in the country’s
sophistication, which consolidated the country’s process of income growth and structural change.

4. CONCLUDING REMARKS

This paper sought to investigate the reasons why the GDP per capita of Brazil fell behind the
GDP per capita of South Korea after 1980, while the latter cough up with the GDP per capita of
developed countries in the following decades. In order to do so, modern techniques of data analysis were
employed, following the methodologies proposed by Hidalgo et al. (2007), Hausmann et al. (2007) and
Hidalgo and Hausmann (2009).

The paper provided two applied contributions to literature. First, it proposed the adoption of
new indexes based on the concept of revealed comparative disadvantage to analyse the performance of
the domestic production in the local market vis-à-vis the foreign competitors. Second, it presented
decade-specific product spaces that highlight the changes of the international division of labour and
trade.

Most importantly, the paper showed how using indexes of revealed comparative advantage and
disadvantage to analyse economies’ diversification, bottlenecks and sophistication can provide
important information to understand development trajectories related to structural change.
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 The Great Divide: the paths of industrial competitiveness in Brazil and south Korea – CEDEPLAR/UFMG – TD 519(2015)

The empirical investigation presented in the paper revealed that the development trajectories of
Brazil and South Korea can be divided in three distinct periods: (i) from 1962 to 1974: the productive
structure of South Korea went through a rapid transformation, with a marked increase in the competitive
production of low-tech goods, while Brazil could only produce a significantly smaller change; (ii) from
1974 to 1992: the structural gap between the two countries was reduced. South Korea reduced its
diversification while increasing the number of medium- and high-tech industries with RCA, and Brazil
increased its diversification while also increasing the number of medium- and high-tech industries with
RCA; (iii) from 1992 onwards: South Korea consolidated its structural transformation towards high
economic sophistication via increasing the share of medium- and high-tech exports, while Brazil was
not able to keep the process of structural change and ended up allowing a process of re-primaryzation
that dramatically reduced the sophistication of the economy.

The explanation for the distinct trajectories of Brazil and South Korea, however, is found in the
policies adopted by the two countries, following their specific historical contexts. The emphasis of South
Korea on export led growth associated with the policy of formation of large national conglomerates (the
chaebols) was crucial for their success. This strategy led to a sharp move from the production of low-
tech to the production of medium- and high-tech manufactured goods, associated with increases in
export shares of such goods. Through that process, South Korea managed to reach high levels of
sophistication and per capita GDP. In contrast, in Brazil, the lack of export promotion led to balance-
of-payment deficits that resulted in the debt crisis of 1980s, which eroded the country’s capacity to
continue the process of structural change necessary for achieving high levels of economic sophistication
and GDP per capita. The difference in population sizes between the two countries played an important
role in the countries’ development stories. Due to the much larger population of Brazil in comparison
with South Korea, a higher number of medium- and high-tech industries with RCA is necessary to reach
high levels of GDP per capita. Consequently, higher costs and effort were necessary to learn to produce
a wider variety of such goods with RCA. In the end, therefore, the country could only reach moderate
economic sophistication, without a high enough number of medium- and high-tech industries with RCA
and without a high enough share of exports from these industries.

To conclude, it is important to stress that the indexes discussed in this paper can be an important
tool for the design of more effective industrial and technological policies. Firstly, identifying the
industries with RCA shows the areas where domestic production is more efficient. Secondly, identifying
industries with high product sophistication close (in the product space) to industries with RCA provides
targets for the development of the economy. Thirdly, combining the information about the industries
with RCD and potential to become exporters, with the information about RCA and the proximity
between industries provides information about the target industries that are most likely to succeed.

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 The Great Divide: the paths of industrial competitiveness in Brazil and south Korea – CEDEPLAR/UFMG – TD 519(2015)

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